How Unions Stop The Cars

Big Labor is a big problem for automakers' survival.

With the late-night demise of legislation containing $14 billion in emergency loans to Detroit's automakers, pressure is once again mounting on President Bush to step in. And he is reportedly thinking of doing just that. But the very thing that doomed this legislation will also doom any effort to rescue the industry: union intransigence. If Bush cares more about taxpayers than kudos, he should decline.

The legislation, backed by Sen. Bob Corker, a Tennessee Republican whose state itself is home to GM facilities, was the industry's best hope to return to health. It stripped some of the green baggage of the House bill that would have consigned Detroit to producing not cars that sell but what eco-warriors want. Nor would the legislation have handed quite as expansive powers of micromanagement to a car czar, forcing companies to obtain approval for basic product and capacity decisions.

Instead, it offered the automakers a way to restructure their massive obligations to labor and debtors, much like a bankruptcy court would do but without the stigma. Bondholders would have been required to accept a 70% loss--the remainder paid in stock, not cash. And Big Labor's main concession (besides accepting some stock instead of cash for its health care trust fund) was that it set a definite date for a pay cut next year.

At that time, its wages and benefits would fall in line with those that Nissan (nasdaq: NSANY - news - people ), Toyota (nyse: TM - news - people ) and other automakers pay their U.S. workers.

But the United Auto Workers reacted as if it had been asked to work in a Third World sweat shop and walked away. Sen. Debbie Stabenow, D-Mich., decried efforts to "sock it" to American workers. Never mind that labor costs make every car rolling out of Detroit $1,500 more expensive to produce than foreign cars made elsewhere in the U.S. Indeed, last year, GM and Toyota sold the same number of cars worldwide, but Toyota turned a healthy profit--while GM posted a $40 billion loss.

But the fact of the matter is that the wage cuts are a necessary condition to give Detroit a fighting chance for survival, but they're not sufficient. Indeed, that would require far more from unions.

Car sales next year are expected to drop 40%. This means that if auto companies are going to use any bailout money to restore viability, they will have to be able to shed some of its quarter-million-strong workforce.

However, if the UAW was unwilling to accept a pay cut, there is no reason to believe that it would compliantly accept such massive layoffs. More likely, it will use taxpayer money to keep every job alive as long as possible--and then return for more a few months later.

Beyond job cuts, the UAW will also have to agree to eliminate a whole host of exceedingly rigid work rules for its remaining constituents. Such rules, for instance, had historically made it difficult to train auto workers for multiple jobs to fulfill multiple needs. No less than labor's extravagant wage demands, these rules have crimped Detroit's adaptability.

Ford recently built a facility in Brazil where it can produce five different vehicle platforms at the same time, on the same line. What's more, many of its suppliers are housed in the facility as well, something that allows them to move parts to the assembly line at a moment's notice. Not only has this lowered Ford's production costs and boosted productivity, it has also given it flexibility to adjust its product mix to shifting market conditions. This is important at any time but is especially crucial now, when volatile oil prices are likely to produce abrupt shifts in consumer demand.

But union rules, with their featherbedding requirements and crabbed job descriptions, make it much harder for such a factory-of-the-future to operate in the U.S.

The irony is that foreign car makers are profitable in America--and the Detroit Three are profitable in every country but America. Only Big Labor can position Detroit carmakers for success in their own country. Bush shouldn't ask already-strapped taxpayers to make sacrifices to pull Detroit back from the precipice when its own key stakeholder won't.

Shikha Dalmia is a senior analyst at the Los Angeles-based Reason Foundation. She can be reached at shikha.dalmia@reason.org.

"Now's the time to make tough decisions," says George Cloutier, chief executive at American Management Services, a small-business consulting firm in Orlando, Fla.

Cutting costs can help free up much needed cash flow during a crunch, but when the economy is expected to stay down indefinitely, more dramatic measures may be in order, he says.

Here are five tactics to help keep your dwindling business capital flowing:

Slash Expenses

Streamlining your business can help you stay in the black even when customers make fewer purchases. Be sure to call in overdue accounts receivables, sell off unsold inventory and analyze expenses such as office space, supplies and even your company's phone bills.

"Cut your costs viciously," says Cloutier. For instance, if you're long-time delivery vendor isn't fulfilling orders on time and it's costing you money, cut them loose. The same is true for employees who aren't pulling their weight. You might even need to do away with some benefits. While having to let go of a trusted staff member or business partner is never ideal, when the economy sinks, business owners need to make tough calls.

Eliminate Unprofitable Operations

Consider spinning off unprofitable business segments, suggests Victor Cheng, a small-business consultant in San Francisco. "Focusing on your core business"—especially if your other divisions are losing money—will serve you in a downturn, he says. To help you figure out what's working and what's not, schedule an appraisal of your business's operations.

Seek Alternative Funding

Some business owners take on a second job. Others use consulting to pad their wallets. One thing is for certain: If you're relying on a credit line to float your business until, say, after the holidays, now's the time to create a backup plan. "Don't assume that line of credit will be there," says Cheng. "If you are in that kind of situation, you either have to have a back up financing source or back up revenue source."

Embrace Incentives

As the nation's unemployment rate ticks up, business owners should think about restructuring their company's compensation, says Dave Waddell, president of Waddell & Associates, an investment firm in Memphis, Tenn. He suggests linking more employee pay to variable incentives such as commissions, which are payments linked to specific sales targets. For instance, if 20% of an employee's compensation stems from commissions, make it 50%.

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While commissions generally work well for sales staff, linking bonuses and other financial incentives to a company's performance is another compensation technique, which generally goes for everyone. "If employees hit goals for the firm, the firm is going to do well even in tough times," says Waddell.

Cut Production Costs

"The only way to make it through a recession is to be a low-cost producer," says Bob Prosen, a small business management consultant in Dallas. Think about it this way: Inefficient competitors can survive for a time at their current cost structures, but in the end, they'll have to either raise prices or go out of business. In contrast, a low-cost producer may try lowering prices to attract added sales, says Prosen. "You're better off taking a little less profit to keep the business going."